Europe risks going the way of Japan

(The views expressed by former British prime minister Gordon Brown are the author’s own and not those of Reuters)

The good news is that Europe is no longer going the way of Greece. The sad news is that it is threatening to go the way of Japan.

After years of hesitation punctuated by panic, Europe has finally accepted the compelling logic that a single currency needs a lender of last resort. Pro-euro voters in the Netherlands have clearly been impressed as the President of the European Central Bank (ECB), Mario Draghi, braved the scowl of the ever-cautious Bundesbank and led his ECB directors to a pledge of unlimited – if conditional – short-dated bond-buying to avert another currency crisis.

The ECB acted in the nick of time; the fuse was set for an explosion next month with the market chaos of both a Greek and Spanish crisis. President Obama has been spared a Eurozone spanner in his campaign for re-election and the chances are we won’t have a pre-November Greek euro exit or Spanish bankruptcy, plus a run on Italy and a French financial crisis just for good measure.

Indeed, now that the ECB is ready to intervene to level short-term bond rates for economies intent on reform and the German Constitutional Court has removed its objections to a bailout fund, there need be no European bust-up over who pays for it.

So far so good – but it is not far enough.

The net effect of the intervention is to halt contagion, not to end the recession; to stop disintegration, rather than start a recovery that would reverse Europe’s downturn. In the week after the market euphoria at the Bank’s decision, private investors, worried about who is first to be repaid in a crisis, are not rushing to return and the ECB still has to address the moral hazard it has created by appearing to guarantee ‘last resort’ funding to countries still likely to go off track. They will now find it difficult to refuse a country support or to push them into an IMF programme.

Far more worryingly, France is likely to join half of Europe in a double-dip recession. Without European leaders following on with a swift and vigorous effort to seize the initiative to grow their economies, Europe will continue to struggle. Unemployment rates of ten per cent and over appear to be the new normal and the West will continue to drag the entire world economy, including China, down.

The temptation is to say that all will be fine, if only a second stage of the rescue – a European banking union – is agreed. Earlier this month Jose Manuel Barroso, President of the European Commission, wrote an impassioned article claiming that a banking union was indeed the game changer.

But a banking union requires more than common euro-wide supervision. It requires also a common resolution fund and common deposit insurance, and these in turn require an agreement to fiscal transfers. Indeed, a banking union of the kind Europe is now discussing is not possible without a fiscal union.

Someone will have to guarantee – and be ready to stump up for – bank recapitalisations, depositors insurance and rescue operations, and it is in the implied transfer of resources from rich to poor that the next set of difficulties lies.

Europe’s banks still have 24 trillion euros of outstanding loans against America’s $14 trillion (11 trillion euros). In the four years since American and British banks recapitalised, added around four per cent more capital and wrote off bad debts (an equivalent four per cent write-off), Europe has added only half a per cent of new bank equity – and submitted to an even smaller write-off of toxic debts.

A bank recapitalisation – upwards of 200 billion euros – looks necessary, and deposit insurance must be underpinned.
This puts three steps firmly on the agenda: a fiscal union, a European finance ministry, and some form of Eurobond – the very questions Germany has tried to side-step.

Such is the depth of feeling about the extent of these constitutional changes that I see the demands growing within the euro area for referenda, a process that will inevitably take years to resolve.

What has deterred the return of confidence is not simply the uncertainty over who is the lender of last resort but, more fundamentally, the continuing absence of the cyclical actions and structural reforms essential to restore European growth.

For four years, a one-dimensional obsession with public debt (‘if austerity is not working, we need more of it’) has led Europe not only to neglect the seismic tremors in its banking system but to underplay its underlying problems of low growth, diminished competitiveness and economic weakness.

Once responsible for 40 per cent of world output, Europe’s share is now only 18 per cent. In the next ten years Europe could decline so fast that this could reduce to little more than 11 or 12 per cent.

Indeed, with the exception of Germany, only a fraction of Europe’s export trade is with the world’s fastest growing economies. Just 7.5 per cent of its exports go to the emerging markets which account for most world growth.

Once at the heart of the global economy, Europe is increasingly placing itself on its periphery.Some say that by the early 2020s Asia will consume 40 per cent of the world’s goods – with Germany consuming only four per cent and France and the UK only three per cent each.

An uncompetitive European south which has failed to engage in structural reforms will inevitably fall further behind. So Europe in 2012 is facing the same problems of financial weakness, economic frailty and worsening debt which have trapped Japan for nearly 25 years.

But today, as a consequence of the decline in the advanced countries’ share of global output, there has emerged a unique structural imbalance that is more serious than the 1980s and cannot be rectified by a repetition of ordinary post-recession policies.

Ten years ago American consumer spending ($10 trillion annually) could propel the world to a higher plateau of growth. Ten years from now Asians, with nearly half of all consumer expenditure, will drive world growth. But we are in a very awkward transition from an old world to a new one: the world’s biggest producers are already the emerging markets, but the world’s biggest consumers are still the advanced economies.

Today neither the western consumer, who now needs to earn to spend, nor the Asian producer, who needs someone to buy their goods, can drive the world economy forward independently of each other.

So high global growth will return only when Asians are confident markets are reviving in the West, and when Americans and Europeans are confident they can pay for their consuming by exporting to the East.

With inflation generally low, a coordinated Central Bank stimulus is justifiable but China can also apply the defibrillator by expanding consumer demand faster than planned and the West can mop up some of the savings glut by advancing much needed infrastructure investment.

The strategy I propose is good for Asia, a life-saver for Europe, and also the quickest way American exports can double as planned.

If President Obama has been spared the pre-election debacle of Greece pulling out and Spain going bust, he is not being spared the glum prospect of country following country into double-dip recession.

As German growth starts to sink to the levels of France, the UK and the euro area, the sense is growing that we are stuck in stagnation for years to come; quagmire is the word that comes to mind.

So the loans offered last week by central bankers will be no more than a band-aid unless followed by a growth plan from the politicians.

Europe has acted to head off a dramatic collapse but the bigger challenge ahead is preventing the long-term decline of the West. Indeed, from now on, what is increasingly going to exercise people is ‘dealing with decline’.

A good and well presented article that asks the correct questions. I would add one further prerequisite for growth (particularly in the peripheral countries) and that is a lower value Euro. This will inevitably cause a degree of imported inflation but the Eurozone has to accept this as part of the price to pay to revitalise the southern economies. Austerity tends not to reduce the labour cost component of exported goods to any significant degree and only a lower Euro will achieve a more competitive price. Unfortunately the ECB appears determined to have a strong Euro so exporters suffer.

Europe’s fate could be worse than that of Japan, but although the West may decline, this is bad news more for the other parts of the world, which depend on the West, one way or another.
The Euro currency is on life support now, instead of playing its initial role, which was to facilitate conditions that would help Europe unite.
The results are far from assured. It’s possible to say that there’s a lot of guessing and wishful thinking involved, as well as risk – lots of it.
Can countries such as Italy and Spain transform themselves into Mediterranean versions of the Bundesrepublik?
-Probably not.
Should they even try?
-It’s up to voters in those countries to decide whether they want to go this way.

“But we are in a very awkward transition from an old world to a new one: the world’s biggest producers are already the emerging markets, but the world’s biggest consumers are still the advanced economies.”

This, in a nutshell, is where Thatcher went wrong. She over-baked the structural reforms that Britain needed in the early 1980’s, endorsed destructive adversarial industrial relations with heavy-handed police backing, and helped kill in short order many industries that were the life-blood of many communities (destroying or exporting to our competitors, generations of skills passed down from father to son)…

Only now (after the banking crisis) are the Conservatives beginning to realise that we need to encourage more manufacturing to return to Britain, to balance our economy… But despite the obvious self-contradiction, my Conservative friends remain unrepentant about Thatcher’s record and long-term legacy, pointing out instead that middle Britain and the banking industry did very well indeed under Thatcher’s Britain (at least, when the country wasn’t a civil war zone paralysed by general strikes and protests)…

I wish that the thrift & budgetary restraint characterising Mr. Brown’s time in Number 11 had continued during his time in Number 10. If so, the longest continuous period of economic growth in British history might have continued, even now; and Mr. Brown might still be in Number 10 Downing Street instead of representing a Scottish constituency and writing articles for Reuters… There would have been no opportunity for investors or speculators to question the structural soundness of the GBP area. The Blair/Brown partnership (tension and all) was good for Britain. We badly need to rebalance to the centre; and neither left nor right of it…

If only also, for a continuation of the traditional integrity of British banking (effectively abolished by Thatcher’s reforms/ period of wanton deregulation)…

p.s. I welcome the rise of the East, and appreciate Brown’s “win-win” formula. Whereas my ancestors were typically:
• Clerks and bus conductors,
• Miners,
• Tailors and designers,
• Engineers, tool-makers and innovators,
• Businessmen and managers (typically of a more equitable and successful sort than those “greed is good” folks that “graced” us during Thatcher’s time);
Instead, I am a software entrepreneur with a computer science background, developing fledgling service export relationships with China, Korea and other parts of the Far East (in addition to Europe and North America).

It’s been a hard road for Britain, and a most unfair rude awakening for many. The road might have been much easier for all of us, but for a little more foresight and caution at the top (perhaps, with a more Teutonic “social market” system). But I have confidence in our future, and the future of the rest of our world; if only we will have the humility to learn from each other (EVEN our traditional political foes).

The bottom line is the weak nations of Europe have to grow export industries. That means subsidies of some sort and new parts of the upper class that into the new industries. Also taxing other parts of economy to pay for it.

Finally, someone of policy making level who understands that there has been a major shift in the tectonic plates underlying the global economy.

Is there any chance that somebody can explain to me why I am either: wrong in my next view, or right and nobody else can see and/or is just in HEAD UNDER PILLOW/BURIED IN SAND mode.

With the global economy, trade, capital flow and directional ratios, as well as supply, demand and capacity demographics as they are: in other words; with the boots of long term growth potential and economic conditions conducive with growth potential firmly on the other foot (or other side of the world should I say); Is there any real chance of us in Blighty, throughout this lifetime and many to comebeing able to maintain what we have come to expect from this country as far as way of life and standards of living goe.

Is there any realistic chance of this? Or are we well and truly, in this part of the world or indeed right across western civilisation (barring natural resources rich countries) firmly on the path toward becoming the India, Africa and South American continent of the 17, 18 and 1900’s.

I personally am convinced of the latter although I would very much appreciate somebody being able to convince me otherwise.

Just one last thing and on a slightly different note from a similar line; does this excessive, constant and relentless focus on growth/concept of growth driving the entire world not concern anyone. I am really surprised that it does not seem to. There has to be more than one logical person in the world.

1)It’s not physically possible, as a result sustainable for anything to be able to continuously and forever grow, even in a two steps forward and one back fashion; it defies logic. Whether it is a physical being, wages and salaries or the national and/or global population.

2)I am particularly alarmed at the rationale being applied to economic management, both global and national, because it is not in any way sustainable. Most definitely not in the long term and to be honest not in the short term either. Are the costs of the Boom, Bust and Recovery cycle really worth any benefits that may or may not arise from such an economic and political agenda and infrastructure.

Are they really worth it? Short term and Long term?

I would like to state clearly before I say this next part – I AM DEFINITELY NOT WHAT SOME MAY CALL A TREE HUGGER OR ANYTHING REMOTELY SIMILAR – but what is wrong with and has anyone ever considered a shift toward sustainability? Surely it is possible?

Do we not have some kind of duty to generations to come in the future? Do we not owe it to ourselves and those before us to preserve the fruits of past labours? Is it not just plain sensible to be focusing on sustainable life, sustainable economy, sustainability across the board rather than this way of life comparible only to parasitic growth, expansion and increased consumption?

Because that or those are essentially the hallmarks of what we bear; parasites, not those that one would associate with the idea of being human and all that we claim that entails; would that not be better demonstrated through an attempt for and focus on a more sustainable life in all manners of speaking???????

Brown – you are the LAST person to be commenting on economic growth!!!

The fact the the WEF uses you as an adviser, is frankly laughable – it also demonstrates that they as a body are of no consequence if they believe any of your ramblings!!

You and your beloved NewLieMore party bankrupted Britain, YOU sold a chunk of the UK’s gold reserves AFTER signalling your intention – thereby getting rock-bottom prices!!

YOU stood up in Parliament & babbled about ending Boom & Bust – then proceeded over the next few years to systematically WRECK the UK economy!

YOU raided UK pension funds – thereby reducing the growth potential on the retirement funds of MILLIONS of workers – all the time accruing a tax payer funded ‘gold plated pension’

Brown – the censor and a degree of politeness prevents me from spelling out my utter contempt for you & your ilk – I will make quite sure that my kids know who is resonsibble for them paying taxes to clear up your incompetence!

Europe also should take heed from the very negative example of the USA. Centralization and loss of political freedom may bring a more coherent upper class, as it has here in America, but it also reduces vibrancy as it does in all centralized States that focus on reducing freedom and political power for the lower classes in return for monolithic political power.

Europe permits a much, much wider selection of policy choices to its various peoples than we have here in the USA. As in China, a shadowy power elite make cloaked decisions behind closed doors and permit no real opposition to their policies. There is essentially no difference between Republican and Democratic policies and no space in the system for political opposition, even as the country careens into a multi-ethnic and multi-racial future that makes Bosnia look unified. This is not a path to follow. Freedom is worth some economic loss.

Personally I would welcome some deflation. I hear that many of the Japanese quite appreciate it, and it doesn’t seem to have done their economy all of the harm that it’s made out to have done!

We ought to have deflation with all of the advances in technology and manufacturing of recent years, and the only reason that we don’t is that our central banks are obsessed with giving us inflation at all costs! This is totally immoral in my opinion, and benefits the banks far above anyone else.

@JSkinner:
~~~~~~~
On the contrary, AVERAGE living standards are still improving (as more innovation brings greater efficiency to manufacturing, and as the pace of competition and innovation is increased by the increasingly globalised nature of trade). The key questions to ask next are:
1. How well are those improvements DISTRIBUTED from top to bottom in our society, and, how well is spending power distributed around the globe?
2. To what degree are we helping the disenfranchised former employees of newly obsolete industries find meaningful work or education?
3. To what extent are we anticipating the natural regressive effects of these technological changes (which concentrate unprecedented economies of scale in very few privileged hands), and recalibrating our systems of taxation to normalise these destructive trends (for the good of all including the rich, and for the sake of making “free market” competition more fair/ meritocratic and making our societies more socially cohesive, less wasteful of congenital talent, and therefore more successful)?

Barring another total world war or major natural disaster, we might expect this trend (improving efficiency and improving MEAN AVERAGE living standards) to generally continue (improving technology will even blunt the impact of rising populations and create arable land from the deserts if only we invest adequately and think ahead). It is our moral responsibility (since these massive economic shifts that I have described are highly predictable) to do something to rebalance our economic system, before these pressures become a major problem.

Let’s take a few industries as examples of what I am talking about:
* Book publishing. Traditionally required physical print media distributed to thousands of book-stores. Now transitioning to efficient electronic sales & distribution arbitrated by only a few dominant market players. (Assuming a competitive market; we should be able to purchase more books with the same amount of money – including many free out-of-copyright classics – perhaps limited only by the quantity we can consume.) Similar economies of scale apply to the music industry.
* Weaving. 100 years ago, British weavers could only manage 30-45 picks per minute across 2-3 yard cloth using shuttle or jacquard looms. These days, rapier or projectile looms weave most of the world’s cloth at 10-20 times that rate (and the Indians have access to that technology too). (Assuming a competitive market; we should be able to purchase more clothes with the same amount of money.)

Such economies create downward pressure on real-terms pricing that are difficult to resist in a globally competitive market.

I recall being told that Winston Churchill, when asked how Britain would survive (in terms of the supply of industrially important minerals such as oil) without an Empire; said that we would survive (or even thrive) through the diversity of suppliers (or, through a truly competitive global market with a multiplicity of suppliers for each essential resource).

HENCE, the Japanese experience of lost decades of growth. Japan is one of the most technologically & socially advanced countries on Earth. Their experience is not unique and is actually fully repeatable (as the Europeans are discovering ahead of their turn, due to weak fiscal policy). All we have to do, in order to bring a similar crisis to our shores (lost British & eventually lost North American decades of growth) is to do nothing!

This is an interesting article but I think Mr Brown misunderstood the statistics that give it its force. The fact that western countries are consuming smaller and smaller percentages of global production does not mean that their citizens are consuming less and less. It simply means that those in the developing countries are “catching up” to us.

The fact that Germany sells most of its exports to the developed nations is not necessarily a condemnation of its economic structure. Probably it just confirms that it sells expensive products that only the wealthy can buy.

Globalisation, the shift of production to the cheap labour developing countries, has allowed those in the west to buy more and more goods, but at the expense of making many of them unemployed and unemployable. That is one of the reasons for the huge government debts – which are still growing.

The sad thing about this article is that Mr Brown appears to think that we as individuals can forever have increasing consumption and we can give it to a forever increasing population. A farmer in Australia, and probably in the UK, who overstocks his farm (with cattle or sheep) would eventually be prosecuted for cruelty to animals, but governments do nothing about stopping world population growth. Mr Brown, of all people, should be well aware that such negligence will end in disaster.

So many of these economists ask these inane questions, but the truth is (in industrialized countries) as population growth goes, so does economic growth. Europe’s population is currently growing at 0.1%; Japan’s is shrinking at 0.8%; America’s is still growing at 1.1% (though it was 3.0% or higher for much of the 20th C). That should tell one all they need to know – without new blood to grow an economy then the population turns into savers and self-interested nihilists. Old wind-bags like Brown fit the latter, and it shows in how worthless the UK economy has become after his reign of terror and letting banks run amok.

“For four years, a one-dimensional obsession with public debt (‘if austerity is not working, we need more of it’) has led Europe not only to neglect the seismic tremors in its banking system but to underplay its underlying problems of low growth, diminished competitiveness and economic weakness.”

A new short article by Reuters columnist Lawrence Summers, with some current evidences supporting Gordon Brown’s warning:
http://blogs.reuters.com/lawrencesummers /2012/09/17/why-the-uk-must-reverse-its -economic-course/

@randburg100
You speak my heart. There may never be any perfect political party/politician but New Labour is just a group of parasitic individuals to the whole human establishment.
So Brown, save your crocodile tears and I cannot see any concrete suggestion/strategy in the article anyway. All I can see are some high-level feel-good babblings that probably make Karl Marx blush.

I am not very well versed in the art of politics and yet it does seem to me that the rush, surge even by European manufacturers to have their high profile products made in ‘China’, may well have begun to backfire. Bosch of Germany for example are already feeling the strain for many people would not buy a Bosch electric drill no matter if it were made in China, Germany or on one of the south sea islands. The people have lost confidence in the brand name that was once held in high esteem! Many other manufacturers are now also feeling the results of their flirtation with China.